Cash Back Mortgages – 6 Things You Need to Know

Kelly Hudson • February 8, 2021
You often see Cash Back Mortgage ads as a lure from the major banks offering cash back incentives on their Mortgage products. Cash back mortgages are becoming increasingly popular among home buyers, particularly those who have limited cash. *Cash Back funds cannot be used for your down payment.

What is a Cash Back Mortgage? The deal is simple: some mortgage lenders offer cash back programs, allowing a 1-5% of the property’s Mortgage value to be rebated to the borrower upon closing. The bank gives you cash up front to use however you want, except as the down payment.  

Purchasing a home comes with many expenses besides saving for the down payment. The cash-back funds can be used for covering closing costs, moving expenses, renovations, paying off debt… any reason you may need additional cash.

Borrowers should be aware that Cash Back products come with catches:

1) Higher interest rates. The cost of the upfront cash is a higher interest rate, depending on how much “Cash Back” you get. The higher interest rate is what pays for the cash the bank is “giving” you. 

With the Cash Back mortgage, the homeowner could pay a significantly higher amount of interest over the term of the mortgage. 

Homeowners need to work with their mortgage broker to crunch the numbers and decide on the best option for their situation:

Continue save for your down payment & closing costs
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Overpay in interest, with the hopes of becoming a homeowner and eventually compensating for the higher interest rates with a possible increase value in the property.

$38,000 difference over 5 years. It’s pretty clear why a Cash Back Mortgage may not be a great deal for the home buyer.


2) Cash back mortgages are only available on fixed-term mortgages of five years. The mortgage must be insured or insurable so that means the property value can’t be any higher than $999,999. 

3) Claw back penalties:  If you need to break your mortgage early, whether to sell or refinance your home before your 5-year mortgage term is complete.… you have to pay the Penalty PLUS return the Cash Back portion to the bank. The Cash Back Penalty is sometimes prorated OR sometimes you need to pay the full amount back, depending on the lender. Check the fine print of your mortgage contract. 

 

4) Variable rate mortgages are not available for Cash Back.

5) Limited availability:  Most lenders offering Cash Back Mortgages are looking for A+ borrowers with a solid credit profile, steady provable income, and typically 5% or more down payment.


6) Cash Back mortgages are available for purchases and mortgage transfers of owner-occupied homes only and not second homes or rental properties.


READ the FINE PRINT. Many people are so excited about the cash back (FREE money who wouldn’t be excited!!!), they miss the fine print on lender’s websites and in their mortgage contract. When a deal seems to be too good to be true, there is always a catch… There is NO Free lunch!


Cash Back mortgages are not offered by all lenders. As a mortgage broker, I have several lenders that offer various types of cash back mortgages. We will review your personal situation, crunch the numbers to ensure that you are fully aware of all the pros and cons of committing to a Cash Back mortgage.


If you are interested in learning more about a Cash Back mortgage or if you currently have a Cash Back mortgage and have questions, let’s have a chat.


Buying a home is both: exciting and nerve wracking. My job is to simplify and educate you about mortgages, so you make good decisions based on your situation.


Kelly Hudson
Mortgage Expert
Mobile: 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com


Kelly Hudson
MORTGAGE ARCHITECTS
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